A recent study by the Asian Development Bank (ADB) suggests that the European Union’s (EU) upcoming Carbon Border Adjustment Mechanism (CBAM) is expected to have only minimal effects on global carbon emissions while modestly impacting trade flows, particularly in Asia and the Pacific region.
Scheduled to be implemented in 2026, CBAM will involve imposing import tariffs on carbon-intensive goods such as steel, cement, and electricity, based on the amount of carbon dioxide emissions embedded in their production processes. The main objective of these tariffs is to counteract “carbon leakage,” which occurs when industries relocate production from regions with strict emission regulations or higher carbon prices to areas with more lenient regulations or lower prices.
However, the ADB’s statistical modeling suggests that CBAM’s potential impact on reducing global carbon emissions is predicted to be minimal, resulting in a decrease of less than 0.2 percent compared to an emissions trading scheme featuring a carbon price of 100 euros ($108) per metric ton without any carbon tariffs. At the same time, these tariffs may lead to a decrease of around 0.4 percent in global exports to the EU and a 1.1 percent reduction in exports from Asia to the EU, while also adversely affecting certain manufacturers within the EU.
Albert Park, ADB’s Chief Economist, highlighted the need to extend carbon pricing initiatives beyond the EU to achieve significant global emissions reductions, especially in Asia. He emphasized that carbon pricing initiatives should cover other regions outside the EU to effectively limit carbon leakage and ensure more effective and sustainable climate efforts.
The report also points out the disproportionate impact of CBAM and the EU’s emissions trading system on Asian sub-regions, particularly Central and West Asia, due to their higher shares of carbon-intensive exports to Europe. To address these concerns, the report suggests implementing incentive mechanisms to encourage widespread adoption of carbon pricing and outlines strategies to decarbonize international trade and global value chains.
These strategies include targeted policies to promote trade in climate-friendly goods and services, support environmental regulations and standards, facilitate the transfer of green technologies, and encourage investments in green infrastructure. Despite concerns about global value chain fragmentation, the report notes that Asia’s global value chains have shown resilience post-COVID-19, highlighting the region’s continued importance in global trade dynamics.
In conclusion, the AEIR 2024 underscores the importance of coordinated efforts to combat climate change and promote sustainable trade practices globally. It urges policymakers to adopt comprehensive strategies to address emissions and trade challenges effectively.
